Entries in Wireless Developments (3)

Monday
Jan102011

Verizon to Begin Offering the iPhone

Long-Awaited Announcement Expected January 11, 2011

Numerous news agencies, including the Wall Street Journal, the Financial Times, NPR and others, are reporting that Verizon Wireless (NYSE:VZ) will formally announce that it will offer Apple’s (Nasdaq:AAPL) iPhone in coming weeks.  A news conference has been scheduled for Janary 11, 2011, and while the companies aren’t commenting, reports indicate that invited reporters include several who focus exclusively on Apple products.

While the announcement has been long anticipated, it remains unclear how dramatic the impact of a Verizon iPhone will be on industry subscriber trends.  On the one hand, subscribers have long complained about the quality (or lack thereof) of AT&T’s network, particularly since iPhone popularity has led to a dramatic increase in data traffic over the network.  On the other hand, Android-based devices, like Motorola Mobility’s (NYSE:MMI) Droid line, have been growing in popularity and market researcher comScore reported on January 6, 2010 that the number of Android users in the US had passed the number of iPhone users for the first time in the three months ended November 30, 2010.

So, just how important has the iPhone been to AT&T?  Very.  Since the iPhone was launched exclusively with AT&T at the end of June 2007, AT&T has garnered fully 50% of total wireless industry net additions.

Verizon’s wireless growth accounted for another 34%, leaving just 16% for everyone else providing wireless service in the U.S. (based on publicly-traded companies).  In the third quarter, AT&T added more than 2.6m subscribers versus Verizon’s 1.1m; everyone else shared about 750k…

Family plans and contract obligations will prevent a wholesale defection of iPhone subscribers from AT&T but we figure over the next two to four quarters Verizon—with its ‘best in the nation’ network—will see a marked improvement in its share of net adds.  But it might be the “all others” category that suffers the most.

Wednesday
Dec222010

Is Broadband the Next Purview of Cord-Cutters?

4G Offerings Will Further Dampen Wired Broadband Growth

Time was the term “cord-cutter” referred to the nearly 30% of Americans who have cancelled their landline voice service, relying solely on their wireless phone for voice communication.  In response to this trend, for a decade or more, ILECs and RLECs nationwide have invested in broadband and video technology, looking to build communications bundles that will create “stickier” customers and generate incremental revenue as an offset to the decline in landline voice accounts.

More recently, we hear “cord-cutting” associated with those consumers who are cancelling their subscription video services, opting instead to rely on “over-the-top” (OTT) video solutions like those offered by Hulu and Netflix.  Admittedly, most of the research indicates that the actual number of video cord-cutters remains low, but the trend has both the cable and ILEC industries worried—and, we think, for good reason.  Generational differences in the habits of younger consumers are sure to perpetuate video cord-cutting, and the Great Recession may have accelerated the shift. (For more on generational segmentation, refer to our Mindshare article in the September, 2010 issue of The ILEC Advisor).  But with 4G wireless service now a reality in dozens of cities nationwide, and based on the data we’ve collected regarding price and speeds, we’re now concerned that broadband access will be the next communications industry segment to be associated with the dreaded “cord-cutter” label.

Granted it’s the early days for the latest generation of mobile wireless services, but following an exhaustive survey of major 4G services now available and a comparison of prices and data speeds with wired broadband solutions, we’ve come to the sad conclusion that, while wireless can never (never say never?) be a complete Internet access substitute (due, for now, to spectrum constraints), broadband cord-cutting is likely to become an increasing reality.  It will begin to happen over the next couple of years in major markets where Sprint/Clearwire, Verizon, MetroPCS and others have already launched 4G, and, over time, it could happen in all but the most rural markets nationwide.  AT&T, which hasn’t even launched a 4G offering yet, reported more than 7.8m ‘connected device’ subscribers at the end of the third quarter, and Clearwire had 2.8m at that time and projects 4m subscribers by year-end—up from initial 2010 guidance of just 2m.

We’re not suggesting that a majority of broadband Internet subscribers will cut the cord tomorrow and opt for a 4G solution instead, but considering that wired broadband penetration gains have not accelerated for two years now, we think the advent of 4G wireless options will simply further retard growth.  That combined with the Net Neutrality rules the FCC is voting on today (12/21), which have more relaxed regulations for wireless providers (this is why Verizon’s lawyers and lobbyists make the big bucks!), will make wireless broadband a force to be contended with in coming years.

Wired broadband penetration has been creeping higher quarter by quarter, but for the public ILECs that we track, the growth has been modest.  In 3Q10, broadband penetration of ILEC access lines rose 111 basis points, to 31.4%.  But if you consider that the number of voice lines has been falling each quarter, the “growth” is really minimal.  Cable broadband penetration (calculated as broadband connections/ basic cable subscribers) rose 171 basis points, to 74.4% over the same period.  Here too, the denominator is shrinking, overstating somewhat the increase in overall broadband customers.  The public cable companies have lost more than half a million subscribers in each of the past two quarters.

      At the end of the day, consumers will evaluate the value proposition offered by wireless broadband providers, and go where they get the most bang for their buck.  Data speeds matter, but the new wireless offerings appear to stack up reasonably well with all but the fiber-based offerings like FiOS—and we believe there may already be more homes passed nationwide by 4G offerings than by fiber-to-the-home services.

Furthermore, the price/ value propositions are compelling.  At the low end, a Clearwire Base Home service can be had for $35/ month and the average WiMax speeds are competitive with DSL—for which the average ILEC was generating $70 or more per broadband sub per month based on a study of monthly ARPU we conducted last spring. 

Broadband cable revenue is generally lower per user—in the $40-$50 range—and the speeds are competitive with WiMax.  Simple lethargy and attachment to those subscription video services will prevent those customers from changing provider rapidly, but in the long run those seeking to replace their $80/ month video package with Netflix’ $9/ month streaming option may opt to end the relationship with their cable provider.  We don’t believe this happens quickly, but Clearwire’s rapid subscriber growth demonstrates a certain amount of pent-up demand.  Ironically, cable providers Time Warner and Comcast are partners in Clearwire and are bringing some of that wireless broadband subscriber growth to the company. 

 

LTE speeds are even stronger than DSL or cable, but the price points are generally higher and metered pricing is likely to become a bigger factor as these new networks are loaded up.  Will the consumers place a premium on mobility?  Some will; early adopters and road warriors with their tablet devices will be the first to try the new services; over time those of us who’ve gotten used to tapping 3G networks via our smartphones will decide it’s time for a faster connection.

The device selection for LTE networks remains limited, and somewhat expensive, but as with everything, those prices will fall.  Verizon, which launched its LTE network on December 5, 2010 with just two USB modem options, will have LTE handsets in volume by the middle of next year.

And let’s not forget about “Apps.”  The major wireless carriers are taking a proactive interest in attracting developers to create the type of applications that have fueled the iPhone’s popularity.  With data speeds averaging between 5 Mbps and 12 Mbps, some pretty cool apps are possible over the LTE network. (I tested my data speeds online while writing this article and found that I’m working with a dismal 1 Mbps download speed and 250 kbps upload speed—and I still manage to view the Youtube videos my mother emails regularly!)

As mentioned above, spectrum issues are the most obvious constraint to wireless carriers as their 4G networks load up, but we don’t underestimate the ability of the industry’s suppliers to engineer more and more capacity out of limited airwaves.  At the same time, the FCC is planning to auction more spectrum and some carriers—Clearwire most notably—have excess capacity and are looking to sell off some chunks in order to raise cash.

The bottom line?  We think it’s still a long time coming—especially in rural markets—but we think the ILEC industry would be ill-advised to discount the long-term ability of next-generation wireless broadband offerings to cut into its revenue growth.  Those investing in fiber networks will benefit from the explosion in backhaul needs, but DSL growth potential is unquestionably limited if you look out beyond the next decade.  And while fiber-based services will compete favorably with wireless broadband, particularly in the enterprise market, not all markets will provide a satisfactory ROI on fiber deployments.

Sunday
Oct312010

FCC Proposes "Mobility Fund" for Underserved Areas

FCC Proposes $100m to $300m Fund to Encourage Deployment of Advanced Wireless Networks

On October 14, 2010, the FCC issued a Notice of Proposed Rulemaking (WT Docket 10-208) wherein it proposed the creation of a new Mobility Fund that would make between $100m and $300m available to bring 3G or higher wireless service to currently un- or under-served areas. 

The funds would use a portion of Universal Service Funds relinquished by Verizon Wireless and Sprint for a one-time payout, and would be allocated based on a “reverse auction.”  The Commission is seeking comment on whether to make support available to any unserved area in the nation or to target support by making it available in a limited set of unserved areas, and also on minimum performance and coverage requirements that should be established in order for the service to be supported by the Mobility Fund. 

In a statement Chairman Julius Genachowski said, “The status quo for USF is unsustainable.  The current program is designed to support the communications networks of the past, not the future.  It is – we have to acknowledge – filled with inefficiencies, providing, for example, annual subsidies of more than $10,000 a line to carriers serving communities where there are unsubsidized competitors.  And it is poorly targeted in too many respects, with perverse incentives and the result that millions of Americans remain unserved by broadband. 

“At the same time, USF’s mission of making sure all Americans have access to communications services at reasonable rates remains vital.  Broadband Internet is supplanting telephone service as our basic communications platform, and it is essential for full participation in our digital economy and 21st century democracy.  Yet today, up to 24 million Americans in the rural areas served by USF are shut out of the broadband future – either fixed or mobile.” 

Genachowski believes that the “market forces” approach of the reverse auction also creates a model for overall USF reform:  “efficiently targeting support to spur private investment in 21st century networks where support is truly needed, while putting USF on a fiscally responsible and sustainable path.” 

Commissioner Michael Copps gave a nod to smaller carriers and native American groups in his statement, noting that consideration needs to be given to how smaller carriers can compete in the bidding and that options for coverage on tribal lands will be examined.  Commissioner Robert McDowell raised concerns about the impact and cost of administration of the fund, concerns that it might result in an increase in the overall size of the USF, concerns that the most remote regions of the country could be left behind and a desire to remove burdensome regulatory hurdles so that winners of the reverse auction succeed over the long run.  Commissioner Meredith Attwell Baker also expressed reservations of the specifics and timing of the Mobility Fund as proposed.  She pointed out that a one-time payment might prove inadequate to maintain infrastructure in the future and also noted the fact that some counties have no wireless service at all, much less 2G service.  She added, “I am optimistic we can consider additional measures, including but not limited to, expanded use of appropriately regulated signal boosters and consumer installed femtocells, to expand our nation’s wireless footprint in a cost-effective manner deeper into rural America. 

Other Wireless Developments:   Verizon Wireless will reportedly start offering a lower priced mobile data service with limited downloads on October 28.  Verizon will also keep its $29.99 unlimited data service for smartphones, according to a source who asked not to be named.  The new offer includes 150 megabytes of data for $15……Leap Wireless-subsidiary Cricket announced on October 19 the launch of nationwide 3G data roaming for its smartphone customers.  Cricket announced the nationwide roaming deal with Sprint back in August……Clearwire and Sprint Nextel gave the launch timeline for three of their largest WiMAX markets: Los Angeles, New York City and San Francisco.  Sprint and Clearwire said they will launch WiMAX service in New York Nov. 1, in Los Angeles Dec. 1 and in San Francisco in late December.  Time Warner Cable also will launch its own branded service in New York, and Comcast will launch its service in San Francisco. Both companies are investors in and wholesale partners of Clearwire……Verizon Wireless said on October 14 that it will begin selling iPads in stores at the end of the month.  Verizon will not offer 3G versions of the popular tablet, but it will sell bundles that include the iPad’s Wi-Fi models and its own mobile hot spot device, which will allow users to connect to the Internet in any place that has 3G service.  The bundles will cost $630 for a 16-gigabyte model, $730 for a 32-gigabyte model and $830 for 64 gigabytes. Verizon will offer a monthly $20 plan to customers for up to 1 gigabyte of data. Verizon will also offer all three iPad models as stand-alone products……Sprint prepaid-division Boost Mobile unveiled a new pricing program designed to fight churn.  The “Monthly Unlimited with Shrinkage” plan will offer customers the opportunity to reduce their $50 monthly unlimited plan to a monthly price of $35 by simply making on-time payments. For every six on-time payments, a customer’s monthly cost will shrink by $5, eventually getting down to $35 a month for unlimited nationwide talk, text, Web, e-mail, IM and calls to 411……The FCC said that it is conducting an industry-wide investigation into cell phone billing practices amid complaints by customers of Verizon Wireless and other carriers of unwanted data charges.  The 10-month-long investigation, which it previously said was focused on Verizon, could subject other carriers to penalties if the FCC finds those firms charged “mystery fees” that violate its “truth and billing” guidelines. The agency didn’t disclose the names of other carriers that are being probed. The investigation comes amid an effort by the FCC to step up its protection of consumers who are increasingly complaining of baffling charges on their cell phone and broadband Internet bills.  Chairman Genachowski has also outlined a proposal that would force carriers to warn users when they are close to reaching voice, text and data limits or about to incur international or other roaming charges.  The wireless trade group CTIA has argued against the FCC's proposals.